TheChek News Flow

The Takeaway

• Millions of consumers have money in fintechs that worked with Synapse

• Collapse spotlighted discrepancies in Synapse’s ledgers

• Board and partners knew of discrepancies for at least two years

Millions of consumers who kept their savings with digital banking startups such as Yotta or Juno have lost access to their money as a result of this month’s collapse of a little-known fintech called Synapse Financial Technologies. Synapse, which supplies some of the basic plumbing that allows startups to offer banking services, filed for bankruptcy protection in early May amid accusations from numerous onetime fintech clients and banks that tens of millions of dollars are unaccounted for.

As Synapse’s problems have spilled out into public view in recent weeks, a key issue has risen to the surface: the company’s records on how much money was in the customer accounts of its fintech clients differed from what its banking and fintech partners’ records showed. And it turns out that’s not a new issue. For at least two years, Synapse’s business partners and its board, which includes partners of its venture backers such as Andreessen Horowitz, were aware of such discrepancies, according to seven former employees.

Chris Slaughter, the CEO of now-defunct bitcoin bank LVL, which previously worked with Synapse, wrote to the bankruptcy court alleging that he had reported to the Federal Reserve Bank in August 2022 that Synapse’s ledgers were “incapable of producing accurate balances.” In a post on X, Synapse CEO Sankaet Pathak labeled Slaughter as “detached from reality.”

In 2022, Synapse’s board launched an audit, using external consultancy Kroll, to try and figure out why there were discrepancies in records of customer accounts. The audit recommended that Synapse and its main banking partner, Evolve Bank & Trust, automate their bookkeeping to better track money flows, according to a person involved in discussions between the two firms. But the companies were unable to agree on doing so. Evolve declined to comment.

The discrepancies have become an issue now because banks that hold deposits on behalf of fintechs working with Synapse froze accounts when Synapse filed for bankruptcy. They’re unwilling to unfreeze the accounts because they don’t know who the customers are or how much money they hold, according to statements made by bank lawyers to the bankruptcy court.

Synapse’s messy collapse has cast a new pall over the beaten-down fintech sector, which was throttled by rising interest rates and an intensifying crackdown by regulators on the banks that power deposits and lending for fintech startups that don’t have a banking license of their own.

The situation has also exposed a regulatory gap that affects customers of fintechs. Because the frozen accounts don’t result from any bank failures, the Federal Deposit Insurance Corp. can’t help cover the missing customer money, according to the Department of Justice’s U.S. Trustee. The Federal Reserve is monitoring the situation, the Trustee said.

Fintech clients of Synapse encountered the discrepancies directly. In one instance, the estate of a deceased person who held a small amount of funds in a Yotta account requested that a check be mailed to the family, a former employee said. When Evolve examined the account, it was empty. Synapse’s dashboard showed it held hundreds of dollars.

Yotta CEO Adam Moelis said the company wasn't aware of the case involving the deceased estate. "If there was a situation where Evolve and Synapse noticed someone didn't have funds at Evolve that should have, Evolve or Synapse should have told us about that immediately," Moelis said.

At a bankruptcy court hearing last Friday, a lawyer representing Yotta said Synapse calculated that Yotta customers held about $111 million at Evolve Bank, while the bank said it was only holding $80 million. “This is a house on fire,” Yotta’s lawyer said.

A Problem Since Day One

Founded in 2014, Synapse was among several startups hoping to disrupt the traditional banking industry with apps that were easier for consumers to use. Most fintechs didn’t have banking licenses, which meant they had to partner with traditional banks to offer deposit accounts and other services. Synapse connected the fintechs’ computer systems with the banks’. By using Synapse, fintechs could dramatically cut the time it took to roll out products.

Synapse did more than simply provide connective software, however. It acted as a one-stop shop for fintechs, by partnering with banks itself, so that a fintech striking a deal with Synapse didn’t have to find its own bank partner to offer financial services. In 2017, Synapse struck a deal with Evolve, a century-old bank based in Tennessee that leaned heavily into the fintech sector by partnering with startups such as Stripe. While Synapse struck other arrangements with banks over time, Evolve was its primary partner, holding the bulk of customer deposits for Synapse’s clients.

Synapse’s business quickly took off. At one point, it had 300 fintech partners, according to Synapse’s former director of partnerships John Moorhead. The company was valued at $180 million after a series B fundraising in 2019, according to PitchBook.

But discrepancies arose early on between what Synapse’s ledgers showed a customer had on deposit and what Evolve’s records showed, according to Sejal Patel, Synapse’s former head of compliance between 2022 and 2023.

“Their books and records would not match,” Patel said. “Customers were constantly complaining that they were being double-debited. Everyone knew there was a huge hole,” she said.

According to two other former Synapse employees, Pathak, the company’s co-founder and CEO, and Mike Rasic, the former chief financial officer, held regular meetings with Evolve Bank executives where since at least 2022 a dominant topic of discussion was about reconciliation issues and potentially missing money. Rasic left the company in late 2023. He declined to comment.

Pathak has pinned the blame for the discrepancies on Evolve, which he claimed in a blog post had failed to address the problems. Patel agreed. “Evolve was never helpful,” Patel said. “They had never dedicated engineering staff or resources to fix the ledgering issues. The response from Evolve was very minimal.”

A spokesman for Evolve denied the allegations that it hadn’t dedicated resources to fixing the ledgering issues.

Other former Synapse employees said Pathak was unwilling to address the issues independently of Evolve.

After Slaughter of LVL complained to the Fed about Synapse, the regulator shared Slaughter’s allegations with the Arkansas State Bank Department, which regulates Evolve, according to a person involved in the matter. The Arkansas agency declined to comment. It is unclear if it took any action. A spokesman for Evolve said the bank was not under investigation.

LVL’s issues were reported to the Synapse board in 2022, whose members included Andreessen Horowitz partner Angela Strange, Trinity Ventures partner Schwark Satyavolu and Core Innovation Capital founder Arjan Schütte, according to the person. Strange, Satyavolu and Schütte did not respond to requests for comment.

Overruled

About two years ago, Synapse’s relationships with its banks began to fray. In early 2022, Evolve stopped taking on new fintech clients, which Patel attributed to regulatory pressure. In the past few years, regulators have grown wary of banks partnering with fintechs, and have taken action against several banks, alleging they lacked the resources to properly monitor the activities of their fast-growing fintech companies. Evolve declined to comment.

Later in 2022, Synapse struck a partnership with Lineage Bank, a small institution based in Tennessee. By that point, Synapse had a long list of fintech partners waiting to be partnered with a bank so they could begin operating, former employees said. But the flood of new accounts was difficult for Lineage to handle, particularly as the bank had just 45 employees, according to former Synapse employees.

According to filings in court, Synapse broadened the range of payment services that its fintech clients could offer through Lineage without notifying the bank in advance, leading to a large volume of transactions that drained one of the bank’s operational accounts.

In January this year, the FDIC ordered Lineage to cut its ties with Synapse and banned it from onboarding new fintech companies without approval.

Meanwhile, Synapse’s relationships with some of its fintech clients were unraveling in disputes over billing. The fintechs pay fees to the banks that hold their accounts, and take a cut of interest paid by banks on deposits; Synapse gets a cut from its fintech clients. In December, Silicon Valley neobank Mercury, a longstanding Synapse client, sued Synapse seeking $30 million it claimed to have been shortchanged in a billing dispute. Synapse counter-sued alleging that Mercury transferred to itself $36 million it wasn’t entitled to. These disputes are not related to discrepancies over how much money customers have in accounts, according to Mercury, which said it believes no customer funds are unaccounted for. The lawsuits have not been resolved.

Both Mercury and another fintech, Dave, cut ties with Synapse and decided to work directly with Evolve, hurting Synapse’s revenue.

After struggling to raise money, Synapse struck a deal In April to sell itself to Softbank-backed TabaPay as part of a bankruptcy reorganization. But that deal quickly fell apart when Synapse froze its technology platform that processed transactions amid claims about discrepancies in its ledgers that emerged in the bankruptcy case.

Former employees blame Pathak’s management for Synapse’s downfall. According to Moorhead, the former director of partnerships, Pathak had clashed with other senior employees, such as the company’s former chief operating officer Ray Picard, who disagreed with his strategy or questioned how he ran things. Picard left Synapse in 2023 and did not respond to a request for comment.

Even as Synapse’s business was encountering challenges, Pathak was busy elsewhere. He is listed in California business records as the CEO of Foundation Robotics Labs, a company founded in February, according to Delaware business records. According to three former Synapse employees, the venture is a robotics and artificial intelligence company that aims to build robots with general artificial intelligence to do tasks. The company is currently in stealth mode, according to a person involved in the venture.

Pathak has other legal matters to deal with aside from the Synapse bankruptcy. He is defending a lawsuit brought by his former San Francisco landlord, who has claimed damages of more than $500,000 for alleged repairs, interest and legal bills for damage to the five-bedroom house where Synapse was created. Pathak declined to comment.